Finance ministers will try to control economic damage

AFP , PARIS

Fri, May 23, 2003 - Page 12

The leaders of eight of the world's most powerful nations, who meet for a summit in France early next month, are likely to prove powerless to remedy a global economy plagued by the collapsing dollar, recession in Germany and the specter of deflation.

Their finance ministers in the G8, representing Britain, Canada, France, Germany, Italy, Japan, Russia and the US, gathered last Friday and Saturday in Deauville, France, ostensibly to prepare the ground for talks at summit level, which are to take place June 1 to 3 at Evian in southeastern France.

But the ministers sidestepped the doom and gloom hanging over the world in a final statement that bordered on collective amnesia.

"While major downside risks have receded, our economies continue to face many challenges," the ministers said.

"We are nonetheless confident in the potential for stronger growth," they agreed, adding that each party should carry out medium-term structural reforms.

So much for recession in Germany, the threat of deflation there and in the US, Italy's negative first-quarter growth and the persistent weakness of the US dollar against the yen and the euro that dampens Japanese and European exports and threatens growth.

Silent on prospects for the dollar, the ministers sparked a speculative spurt on exchange markets, where the euro surged beyond its 1999 launch level to around US$1.17.

Further punishing the greenback, US Secretary of the Treasury John Snow did little to squelch suspicions that the US had abandoned its strong-dollar policy.

It remains then for French President Jacques Chirac, host of the Evian summit, and his counterparts to reassure consumers, entrepreneurs and investors who are growing increasingly anxious and are looking for action.

But analysts are wondering if the heads of state and government will be able to do any better than their finance ministers. By most accounts it is the exchange-rate issue that is most pressing -- and also the most delicate -- under current circumstances.

"If the Europeans accuse the Americans of driving down the dollar, the latter can simply respond that the Europeans have only to lower their interest rates," noted one European official who asked not to be named.

He added that European leaders at Evian run the risk of reviving the acute diplomatic friction with the US that emerged in the run-up to the US-led invasion of Iraq. Chirac sees the the Evian gathering as a prime opportunity to heal a particularly bitter rift between Paris and Washington, he said.

At the moment the European Central Bank appears amenable to easing monetary policy -- its benchmark interest rate is currently 2.50 percent.